Multi Asset

Risks are rising: the Fed must thread a narrowing needle-eye to stop inflation without causing a recession. We’ve lightened equity positioning and reduced risk within fixed income segments of portfolios.

As investors face heightened inflation risk and other uncertainties, look beyond traditional investment buckets to capture alternative sources of returns.

Fear of inflation, which has driven stocks and bonds down in tandem year to date, is expanding to fear of a growth slowdown, potentially leading to a capitulation point. If this shift takes hold, and stagflation risk has been priced in to reach a new equilibrium, it could restore the normal relationship between stocks and bonds.

Despite our view that a U.S. economic contraction is avoidable in the near term, the outlook for equities has deteriorated since the beginning of the year and we think this sour spot is likely to last as monetary policy becomes tighter.

Russia’s energy tentacles, intertwined throughout Europe’s power network, may prove difficult to excise.

Should the Russia-Ukraine conflict persist, it would lead to further tightening of financial conditions but is unlikely to deter the Federal Reserve from a 25 basis point interest rate hike in March. Tighter conditions will slow economic growth at the margins and constrain financial markets over the short term, but not over the longer term.

• Economic recovery likely undeterred: Rising energy prices add risk to Europe’s recovery but are unlikely to derail the global economic recovery.
• Expect further equity volatility: We see the strongest impacts in commodities, energy and financials, but focus should shift quickly to interest rates and supply-chain resolution.
• Seeing value amid spread widening: We believe the impact of Russia’s actions on fixed income markets has largely played out, and any further widening in credit spreads could present opportunities.

We see scope for continued global equity gains as the impacts from Covid, policy stimulus and inflation diminish. The current balance of market factors keeps us overweight U.S. large cap stocks.

With only 10 days left until Christmas, will you receive your gifts on time? Hear what Barbara Reinhard, CFA, Head of Asset Allocation, believes the impact of the global supply chain crisis has on this year’s holiday shopping season.

Though the inflation debate continues, we concur with the Federal Reserve that price increases will be manageable. We believe the Fed can conduct monetary operations along its well communicated path, paving the way for reaccelerating, above-trend 4Q21 real GDP growth.